Help me here, clearing my thoughts…
I understand the BOD determines the declaration, record, and payable date.
If the ex dividend date is decided by NYSE or FINRA…
If the record date is one day the 1 day prior/before the ex dividend date…
Does this mean, the BOD has to wait for the ex dividend date to be established by NYSE or FINRA?
Does this also imply that there could be a few weeks between when the BOD calls for the declaration date and when the ex dividend date is called?
Thanks
Getting the dates straight has been an issue for me too (sitting tomorrow for the exam so we’ll see how it pans out), but remembering the DERP (declaration, ex, record, payable) date-order acronym has been really helpful. I don’t think the record date would ever come before the ex-date.
Hi @Mizanne and @Shep - thanks for using Achievable!
When we say NYSE or FINRA sets ex-dates, it’s because they determine settlement for securities. Right now, T+2 is the settlement for stock, but the NYSE could change that for NYSE-listed stocks, while FINRA could change it for OTC stocks. In fact, they recently changed settlement timeframes a few years ago from T+3 to the current T+2.
Now, does this mean the BOD needs to wait for the ex-date to be established? No. With T+2 currently being the standard for stock settlement, the ex-date is the day before the record date. This will always be true until the NYSE or FINRA changes settlement timeframes, which they may do in the future. The ex-date “is what it is” given settlement. However, the BOD will arbitrarily choose the declaration date, record date, and payable date.
Let’s work through a quick example together. Let’s assume the BOD declares following:
Declaration date = Monday June 1st
Record date = Wednesday, July 10th
Payable date = Friday, August 1st
The declaration date is the date they make the dividend announcement. The payable date is when they make the payment. There’s not much more to those dates than that.
The question that most are challenged by surrounds the record date. In order for the investor to be paid the dividend on the payable date, they must be a settled owner of the stock on Wednesday, July 10th (the record date). As both of you know, the ex-date for cash dividends is always one business day prior to the record date. Therefore, the ex-date is Tuesday, July 9th.
As taught in the material, the word ‘ex’ means “without.” The stock starts trading without the dividend on Tuesday, July 9th. Let’s discuss why.
If an investor purchases the stock on Tuesday, July 9th (the ex-date), when will the trade settle? T+2. Tuesday is the trade date, Wednesday is business day 1, Thursday is business day 2. It will settle on Thursday, July 11th. Remember, the investor must be a settled owner by the record date, and that does not occur here. Buying the stock on the ex-date results in not getting the dividend (due to settlement).
Something else to think about - if an investor owns the stock and sells it on the ex-date, they’ll keep the dividend. They’re selling the stock “without the dividend” when selling it on or after the ex-date. If a sale occurs on Tuesday, July 9th, the seller will not be taken off the shareholder list until Thursday, July 11th. When the transfer agent takes a look at the shareholder list on the record date (Wednesday, Jul 10th), the seller will still be there, which is why they keep the dividend.
Now, if an investor wants to purchase the stock and get the upcoming dividend, they need to purchase the stock the day before the ex-date (or before). This would be Monday, July 8th (or before). If the investor purchases it on that date, the trade will settle on Wednesday, July 10th. They would be on the shareholder list by the time the transfer agent looks at it.
In summary, here are the big points to remember:
Order of the dividend dates
D - declaration
E - ex-date
R - record date
P - payable date
From the perspective of a buyer
From the perspective of a seller
I hope this helps! Please respond with any more questions or concerns.